[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR301.6323(b)-1]

[Page 232-239]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 301_PROCEDURE AND ADMINISTRATION--Table of Contents
 
                               Collection
 
Sec. 301.6323(b)-1  Protection for certain interests even though notice 
filed.

    (a) Securities--(1) In general. Even though a notice of a lien 
imposed by section 6321 is filed in accordance with Sec. 301.6323(f)-1, 
the lien is not valid with respect to a security (as defined in 
paragraph (d) of Sec. 301.6323(h)-1) against--
    (i) A purchaser (as defined in paragraph (f) of Sec. 301.6323(h)-1) 
of the security who at the time of purchase did not have actual notice 
or knowledge (as defined in paragraph (a) of Sec. 301.6323(i)-1) of the 
existence of the lien;
    (ii) A holder of a security interest (as defined in paragraph (a) of 
Sec. 301.6323(h)-1) in the security who did not have actual notice or 
knowledge (as defined in paragraph (a) of Sec. 301.6323(i)-1) of the 
existence of the lien at the time the security interest came into 
existence or at the time such security interest was acquired from a 
previous holder for a consideration in money or money's worth; or
    (iii) A transferee of an interest protected under subdivision (i) or 
(ii) of this subparagraph to the same extent the lien is invalid against 
his transferor.

For purposes of subdivision (iii) of this subparagraph, no person can 
improve his position with respect to the lien by reacquiring the 
interest from an intervening purchaser or holder of a security interest 
against whom the lien is invalid.
    (2) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. On May 1, 1969, in accordance with Sec. 301.6323(f)-1, a 
notice of lien is filed with respect to A's delinquent tax liability. On 
May 20, 1969. A sells 100 shares of common stock in X corporation to B, 
who, on the date of the sale, does not have actual notice or knowledge 
of the existence of the lien. Because B purchased the stock without 
actual notice or knowledge of the lien, under subdivision (i) of 
subparagraph (1) of this paragraph, the stock purchased by B is not 
subject to the lien.
    Example 2. Assume the same facts as in example 1 except that on May 
30, 1969, B sells the 100 shares of common stock in X corporation to C 
who on May 5, 1969, had actual notice of the existence of the tax lien 
against A. Because the X stock when purchased by B

[[Page 233]]

was not subject to the lien, under subdivision (iii) of subparagraph (1) 
of this paragraph, the stock purchased by C is not subject to the lien. 
C succeeds to B's rights, even though C had actual notice of the lien 
before B's purchase.
    Example 3. On June 1, 1970, in accordance with Sec. 301.6323(f)-1, 
a notice of lien is filed with respect to D's delinquent tax liability. 
D owns 20 $1,000 bonds issued by the Y company. On June 10, 1970, D 
obtains a loan from M bank for $5,000 using the Y company bonds as 
collateral. At the time the loan is made M bank does not have actual 
notice or knowledge of the existence of the tax lien. Because M bank did 
not have actual notice or knowledge of the lien when the security 
interest came into existence, under subdivision (ii) of subparagraph (1) 
of this paragraph, the tax lien is not valid against M bank to the 
extent of its security interest.
    Example 4. Assume the same facts as in example 3 except that on June 
19, 1970, M bank assigns the chose in action and its security interest 
to N, who had actual notice or knowledge of the existence of the lien on 
June 1, 1970. Because the security interest was not subject to the lien 
to the extent of M bank's security interest, the security interest held 
by N is to the same extent entitled to priority over the tax lien 
because N succeeds to M bank's rights. See subdivision (iii) of 
subparagraph (1) of this paragraph.
    Example 5. On July 1, 1970, in accordance with Sec. 301.6323(f)-1, 
a notice of lien is filed with respect to E's delinquent tax liability. 
E owns ten $1,000 bonds issued by the Y company. On July 5, 1970, E 
borrows $4,000 from F and delivers the bonds to F as collateral for the 
loan. At the time the loan is made, F has actual knowledge of the 
existence of the tax lien and, therefore, holds the security interest 
subject to the lien on the bonds. On July 10, 1970, F sells the security 
interest to G for $4,000 and delivers the Y company bonds pledged as 
collateral. G does not have actual notice or knowledge of the existence 
of the lien on July 10, 1970. Because G did not have actual notice or 
knowledge of the lien at the time he purchased the security interest, 
under subdivision (ii) of subparagraph (1) of this paragraph, the tax 
lien is not valid against G to the extent of his security interest.
    Example 6. Assume the same facts as in example 5 except that, 
instead of purchasing the security interest from F on July 10, 1970, G 
lends $4,000 to F and takes a security interest in F's security interest 
in the bonds on that date. Because G became the holder of a security 
interest in a security interest after notice of lien was filed and does 
not directly have a security interest in a security, the security 
interest held by G is not entitled to a priority over the tax lien under 
the provisions of subparagraph (1) of this paragraph.

    (b) Motor vehicles--(1) In general. Even though a notice of a lien 
imposed by section 6321 is filed in accordance with Sec. 301.6323(f)-1, 
the lien is not valid against a purchaser (as defined in paragraph (f) 
of Sec. 301.6323(h)-1) of a motor vehicle (as defined in paragraph (c) 
of Sec. 301.6323(h)-1) if--
    (i) At the time of the purchase, the purchaser did not have actual 
notice or knowledge (as defined in paragraph (a) of Sec. 301.6323(i)-1) 
of the existence of the lien, and
    (ii) Before the purchaser obtains such notice or knowledge, he has 
acquired actual possession of the motor vehicle and has not thereafter 
relinquished actual possession to the seller or his agent.
    (2) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. A, a delinquent taxpayer against whom a notice of tax 
lien has been filed in accordance with Sec. 301.6323(f)-1, sells his 
automobile (which qualifies as a motor vehicle under paragraph (c) of 
Sec. 301.6323(h)-1) to B, an automobile dealer. B takes actual 
possession of the automobile and does not thereafter relinquish actual 
possession to the seller or his agent. Subsequent to his purchase, B 
learns of the existence of the tax lien against A. Even though notice of 
lien was filed before the purchase, the lien is not valid against B, 
because B did not know of the existence of the lien before the purchase 
and before acquiring actual possession of the vehicle.
    Example 2. C is a wholesaler of used automobiles. A notice of lien 
has been filed with respect to C's delinquent tax liability in 
accordance with Sec. 301.6323(f)-1. Subsequent to such filing, D, a 
used automobile dealer, purchases and takes actual possession of 20 
automobiles (which qualify as motor vehicles under the provisions of 
paragraph (c) of Sec. 301.6323(h)-1) from C at an auction and places 
them on his lot for sale. C does not reacquire possession of any of the 
automobiles. At the time of his purchase, D does not have actual notice 
or knowledge of the existence of the lien against C. Even though notice 
of lien was filed before D's purchase, the lien was not valid against D 
because D did not know of the existence of the lien before the purchase 
and before acquiring actual possession of the vehicles.

    (3) Cross reference. For provisions relating to additional 
circumstances in which the lien imposed by section 6321 may not be valid 
against the purchaser

[[Page 234]]

of tangible personal property (including a motor vehicle) purchased at 
retail, see paragraph (c) of this section.
    (c) Personal property purchased at retail--(1) In general. Even 
though a notice of a lien imposed by section 6321 is filed in accordance 
with Sec. 301.6323(f)-1, the lien is not valid against a purchaser (as 
defined in paragraph (f) of Sec. 301.6323(h)-1) of tangible personal 
property purchased at a retail sale (as defined in subparagraph (2) of 
this paragraph (c)) unless at the time of purchase the purchaser intends 
the purchase to (or knows that the purchase will) hinder, evade, or 
defeat the collection of any tax imposed by the Internal Revenue Code of 
1954.
    (2) Definition of retail sale. For purposes of this paragraph, the 
term ``retail sale'' means a sale, made in the ordinary course of the 
seller's trade or business, of tangible personal property of which the 
seller is the owner. Such term includes a sale in customary retail 
quantities by a seller who is going out of business, but does not 
include a bulk sale or an auction sale in which goods are offered in 
quantities substantially greater than are customary in the ordinary 
course of the seller's trade or business or an auction sale of goods the 
owner of which is not in the business of selling such goods.
    (3) Example. The application of this paragraph may be illustrated by 
the following example:

    Example. A purchases a refrigerator from the M company, a retail 
appliance dealer. Prior to such purchase, a notice of lien was filed 
with respect to M's delinquent tax liability in accordance with Sec. 
301.6323(f)-1. At the time of the purchase A knows of the existence of 
the lien. However, A does not intend the purchase to hinder, evade, or 
defeat the collection of any internal revenue tax, and A does not have 
any reason to believe that the purchase will affect the collection of 
any internal revenue tax. Even though notice of lien was filed before 
the purchase, the lien is not valid against A because A in good faith 
purchased the refrigerator at retail in the ordinary course of the M 
company's business.

    (d) Personal property purchased in casual sale--(1) In general. Even 
though a notice of a lien imposed by section 6321 is filed in accordance 
with Sec. 301.6323(f)-1, the lien is not valid against a purchaser (as 
defined in Sec. 301.6323(h)-1(f)) of household goods, personal effects, 
or other tangible personal property of a type described in Sec. 
301.6334-1 (which includes wearing apparel; school books; fuel, 
provisions, furniture, arms for personal use, livestock, and poultry 
(whether or not the seller is the head of a family); and books and tools 
of a trade, business, or profession (whether or not the trade, business, 
or profession of the seller)), purchased, other than for resale, in a 
casual sale for less than $250 (excluding interest and expenses 
described in Sec. 301.6323(e)-1). For purposes of this paragraph, a 
casual sale is a sale not made in the ordinary course of the seller's 
trade or business.
    (2) Limitation. This paragraph applies only if the purchaser does 
not have actual notice or knowledge (as defined in paragraph (a) of 
Sec. 301.6323(i)-1)--
    (i) Of the existence of the tax lien, or
    (ii) That the sale is one of a series of sales.

For purposes of subdivision (ii) of this subparagraph, a sale is one of 
a series of sales if the seller plans to dispose of, in separate 
transactions, substantially all of his household goods, personal 
effects, and other tangible personal property described in Sec. 
301.6334-1.
    (3) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. A, an attorney's widow, sells a set of law books for $200 
to B, for B's own use. Prior to the sale a notice of lien was filed with 
respect to A's delinquent tax liability in accordance with Sec. 
301.6323(f)-1. B has no actual notice or knowledge of the tax lien. In 
addition, B does not know that the sale is one of a series of sales. 
Because the sale is a casual sale for less than $250 and involves books 
of a profession (tangible personal property of a type described in Sec. 
301.6334-1, irrespective of the fact that A has never engaged in the 
legal profession), the tax lien is not valid against B even though a 
notice of lien was filed prior to the time of B's purchase.
    Example 2. Assume the same facts as in example 1 except that B 
purchases the books for resale in his second-hand bookstore. Because B 
purchased the books for resale, he purchased the books subject to the 
lien.
    Example 3. In an advertisement appearing in a local newspaper, G 
indicates that he is offering for sale a lawn mower, a used television 
set, a desk, a refrigerator, and certain used dining room furniture. In 
response to the advertisement, H purchases the dining room furniture for 
$200. H does not receive

[[Page 235]]

any information which would impart notice of a lien, or that the sale is 
one of a series of sales, beyond the information contained in the 
advertisement. Prior to the sale a notice of lien was filed with respect 
to G's delinquent tax liability in accordance with Sec. 301.6323(f)-1. 
Because H had no actual notice or knowledge that substantially all of 
G's households goods were being sold, or that the sale is one of a 
series of sales and because the sale is a casual sale for less than 
$250, H does not purchase the dining room furniture subject to the lien. 
The household goods are of a type described in Sec. 301.6334-1(a)(2) 
irrespective of whether G is the head of a family or whether all such 
household goods offered for sale exceed $500 in value.

    (e) Personal property subject to possessory liens. Even though a 
notice of a lien imposed by section 6321 is filed in accordance with 
Sec. 301.6323(f)-1, the lien is not valid against a holder of a lien on 
tangible personal property which under local law secures the reasonable 
price of the repair or improvement of the property if the property is, 
and has been, continuously in the possession of the holder of the lien 
from the time the possessory lien arose. For example, if local law gives 
an automobile repairman the right to retain possession of an automobile 
he has repaired as security for payment of the repair bill and the 
repairman retains continuous possession of the automobile until his lien 
is satisfied, a tax lien filed in accordance with section 6323(f)(1) 
which has attached to the automobile will not be valid to the extent of 
the reasonable price of the repairs. It is immaterial that the notice of 
tax lien was filed before the repairman undertook his work or that he 
knew of the lien before undertaking the work.
    (f) Real property tax and special assessment liens--(1) In general. 
Even though a notice of a lien imposed by section 6321 is filed in 
accordance with Sec. 301.6323(f)-1, the lien is not valid against the 
holder of another lien upon the real property (regardless of when such 
other lien arises), if such other lien is entitled under local law to 
priority over security interests in real property which are prior in 
time and if such other lien on real property secures payment of--
    (i) A tax of general application levied by any taxing authority 
based upon the value of the property;
    (ii) A special assessment imposed directly upon the property by any 
taxing authority, if the assessment is imposed for the purpose of 
defraying the cost of any public improvement; or
    (iii) Charges for utilities or public services furnished to the 
property by the United States, a State or political subdivision thereof, 
or an instrumentality of any one or more of the foregoing.
    (2) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. A owns Blackacre in the city of M. A notice of lien 
affecting Blackacre is filed in accordance with Sec. 301.6323(f)-1. 
Subsequent to the filing of the notice of lien, the city of M acquires a 
lien against Blackacre to secure payment of real estate taxes. Such 
taxes are levied against all property in the city in proportion to the 
value of the property. Under local law, the holder of a lien for real 
property taxes is entitled to priority over a security interest in real 
property even though the security interest is prior in time. Because the 
real property tax lien held by the city of M secures payment of a tax of 
general application and is entitled to priority over security interests 
which are prior in time, the lien held by the city of M is entitled to 
priority over the Federal tax lien with respect to Blackacre.
    Example 2. B owns Whiteacre in N county. A notice of lien affecting 
Whiteacre is filed in accordance with Sec. 301.6323(f)-1. Subsequent to 
the filing of the notice of lien, N county constructs a sidewalk, paves 
the street, and installs water and sewer lines adjacent to Whiteacre. In 
order to defray the cost of these improvements, N county imposes upon 
Whiteacre a special assessment which under local law results in a lien 
upon Whiteacre that is entitled to priority over security interests that 
are prior in time. Because the special assessment lien is (i) entitled 
under local law to priority over security interests which are prior in 
time, and (ii) imposed directly upon real property to defray the cost of 
a public improvement, the special assessment lien has priority over the 
Federal tax lien with respect to Whiteacre.
    Example 3. C owns Greenacre in town O. A notice of lien affecting 
Greenacre is filed in accordance with Sec. 301.6323(f)-1. Town O 
furnishes water and electricity to Greenacre and periodically collects a 
fee for these services. Subsequent to the filing of the notice of lien, 
town O supplies water and electricity to Greenacre, and C fails to pay 
the charges for these services. Under local law, town O acquires a lien 
to secure charges for the services, and this lien has priority over 
security interests which are prior in time. Because the lien of town O 
(i) is for services furnished to the real property and (ii) has priority 
over earlier security interests, town O's lien has

[[Page 236]]

priority over the Federal tax lien with respect to Greenacre.

    (g) Residential property subject to a mechanic's lien for certain 
repairs and improvements--(1) In general. Even though a notice of a lien 
imposed by section 6321 is filed in accordance with Sec. 301.6323(f)-1, 
the lien is not valid against a mechanic's lienor (as defined in Sec. 
301.6323(h)-(b)) who holds a lien for the repair or improvement of a 
personal residence if--
    (i) The residence is occupied by the owner and contains no more than 
four dwelling units, and
    (ii) The contract price on the prime contract with the owner for the 
repair or improvement (excluding interest and expenses described in 
Sec. 301.6323(e)-1) is not more than $1,000.

For purposes of subdivision (ii) of this subparagraph, the amounts of 
subcontracts under the prime contract with the owner are not to be taken 
into consideration for purposes of computing the $1,000 prime contract 
price. It is immaterial that the notice of tax lien was filed before the 
contractor undertakes his work or that he knew of the lien before 
undertaking the work.
    (2) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. A owns a building containing four apartments, one of 
which he occupies as his personal residence. A notice of lien which 
affects the building is filed in accordance with Sec. 301.6323(f)-1. 
Thereafter, A enters into a contract with B in the amount of $800, which 
includes labor and materials, to repair the roof of the building. B 
purchases roofing shingles from C for $300. B completes the work and A 
fails to pay B the agreed amount. In turn, B fails to pay C for the 
shingles. Under local law, B and C acquire mechanic's liens on A's 
building. Because the contract price on the prime contract with A is not 
more than $1,000 and under local law B and C acquire mechanic's liens on 
A's building, the liens of B and C have priority over the Federal tax 
lien.
    Example 2. Assume that same facts as in example 1, except that the 
amount of the prime contract between A and B is $1,100. Because the 
amount of the prime contract with the owner, A, is in excess of $1,000, 
the tax lien has priority over the entire amount of each of the 
mechanic's liens of B and C, even though the amount of the contract 
between B and C is $300.
    Example 3. Assume the same facts as in example 1, except that A and 
B do not agree in advance upon the amount due under the prime contract 
but agree that B will perform the work for the cost of materials and 
labor plus 10 percent of such cost. When the work is completed, it is 
determined that the total amount due is $850. Because the prime contract 
price is not more than $1,000 and under local law B and C acquire 
mechanic's liens on A's residence, the liens of B and C have priority 
over the Federal tax lien.

    (h) Attorney's liens--(1) In general. Even though notice of a lien 
imposed by section 6321 is filed in accordance with Sec. 301.6323(f)-1, 
the lien is not valid against an attorney who, under local law, holds a 
lien upon, or a contract enforceable against, a judgment or other amount 
in settlement of a claim or of a cause of action. The priority afforded 
an attorney's lien under this paragraph shall not exceed the amount of 
the attorney's reasonable compensation for obtaining the judgment or 
procuring the settlement. For purposes of this paragraph, reasonable 
compensation means the amount customarily allowed under local law for an 
attorney's services for litigating or settling a similar case or 
administrative claim. However, reasonable compensation shall be 
determined on the basis of the facts and circumstances of each 
individual case. It is immaterial that the notice of tax lien is filed 
before the attorney undertakes his work or that the attorney knows of 
the tax lien before undertaking his work. This paragraph does not apply 
to an attorney's lien which may arise from the defense of a claim or 
cause of action against a taxpayer except to the extent such lien is 
held upon a judgment or other amount arising from the adjudication or 
settlement of a counterclaim in favor of the taxpayer. In the case of 
suits against the taxpayer, see Sec. 301.6325-1(d)(2) for rules 
relating to the subordination of the tax lien to facilitate tax 
collection.
    (2) Claim or cause of action against the United States. Paragraph 
(h)(1) of this section does not apply to an attorney's lien with respect 
to--
    (i) Any judgment or other fund resulting from the successful 
litigation or settlement of an administrative claim or cause of action 
against the United States to the extent that the

[[Page 237]]

United States, under any legal or equitable right, offsets its liability 
under the judgment or settlement against any liability of the taxpayer 
to the United States, or
    (ii) Any amount credited against any liability of the taxpayer in 
accordance with section 6402.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. A notice of lien is filed against A in accordance with 
Sec. 301.6323(f)-1. Subsequently, A is struck by an automobile and 
retains B, an attorney to institute suit on A's behalf against the 
operator of the automobile. B knows of the tax lien before he begins his 
work. Under local law, B is entitled to a lien upon any recovery in 
order to secure payment of his fee. A is awarded damages of $10,000. B 
charges a fee of $3,000 which is the fee customarly allowed under local 
law in similar cases and which is found to be reasonable under the 
circumstances of this particular case. Because, under local law, B holds 
a lien for the amount of his reasonable compensation for obtaining the 
judgment, B's lien has priority over the Federal tax lien.
    Example 2. Assume the same facts as in example 1, except that before 
suit is instituted A and the owner of the automobile settle out of court 
for $7,500. B charges a reasonable and customary fee of $1,800 for 
procuring the settlement and under local law holds a lien upon the 
settlement in order to secure payment of the fee. Because, under local 
law, B holds a lien for the amount of his reasonable compensation for 
obtaining the settlement, B has priority over the Federal tax lien.
    Example 3. In accordance with Sec. 301.6323(f)-1, a notice of lien 
in the amount of $8,000 is filed against C, a contractor. Subsequently C 
retains D, an attorney, to initiate legal proceedings to recover the 
amount allegedly due him for construction work he has performed for the 
United States. C and D enter into an agreement which provides that D 
will receive a reasonable and customary fee of $2,500 as compensation 
for his services. Under local law, the agreement will give rise to a 
lien which is enforceable by D against any amount recovered in the suit. 
C is successful in the suit and is awarded $10,000. D claims $2,500 of 
the proceeds as his fee. The United States, however, exercises its right 
of set-off and applies $8,000 of the $10,000 award to satisfy C's tax 
liability. Because the $10,000 award resulted from the successful 
litigation of a cause of action against the United States, B's contract 
for attorney's fees is not enforceable against the amount recovered to 
the extent the United States offsets its liability under the judgment 
against C's tax liability. It is immaterial that D had no notice or 
knowledge of the tax lien at the time he began work on the case.

    (i) Certain insurance contracts--(1) In general. Even though a 
notice of a lien imposed by section 6321 is filed in accordance with 
Sec. 301.6323(f)-1, the lien is not valid with respect to a life 
insurance, endowment, or annuity contract, against an organization which 
is the insurer under the contract, at any time--
    (i) Before the insuring organization has actual notice or knowledge 
(as defined in paragraph (a) of Sec. 301.6323(i)-1) of the existence of 
the tax lien,
    (ii) After the insuring organization has actual notice or knowledge 
of the lien (as defined in paragraph (a) of Sec. 301.6323(i)-1), with 
respect to advances (including contractual interest thereon as provided 
in paragraph (a) of Sec. 301.6323(e)-1) required to be made 
automatically to maintain the contract in force under an agreement 
entered into before the insuring organization had such actual notice or 
knowledge, or
    (iii) After the satisfaction of a levy pursuant to section 6332(b), 
unless and until the district director delivers to the insuring 
organization a notice (for example, another notice of levy, a letter, 
etc.), executed after the date of such satisfaction, that the lien 
exists.

Delivery of the notice described in subdivision (iii) of this 
subparagraph may be made by any means, including regular mail, and 
delivery of the notice shall be effective only from the time of actual 
receipt of the notification by the insuring organization. The provisions 
of this paragraph are applicable to matured as well as unmatured 
insurance contracts.
    (2) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. On May 1, 1964, the X insurance company issues a life 
insurance policy to A. On June 1, 1970, a tax assessment is made against 
A, and on June 2, 1970, a notice of lien with respect to the assessment 
is filed in accordance with Sec. 301.6323(f)-1. On July 1, 1970, 
without actual notice or knowledge of the tax lien, the X company makes 
a ``policy loan'' to A. Under subparagraph (1)(i) of this paragraph, the 
loan, including interest (in accordance with the provisions of paragraph 
(a) of Sec. 301.6323(e)-1), will have priority over the tax lien 
because X company did not have

[[Page 238]]

actual notice or knowledge of the tax lien at the time the policy loan 
was made.
    Example 2. On May 1, 1964, B enters into a life insurance contract 
with the Y insurance company. Under one of the provisions of the 
contract, in the event a premium is not paid, Y is to advance out of the 
cash loan value of the policy the amount of an unpaid premium in order 
to maintain the contract in force. The contract also provides for 
interest on any advances so made. On June 1, 1971, a tax assessment is 
made against B, and on June 2, 1971, in accordance with section 6323(f)-
1, a notice of lien is filed. On July 1, 1971, B fails to pay the 
premium due on that date, and Y makes an automatic premium loan to keep 
the policy in force. At the time the automatic premium loan is made, Y 
had actual knowledge of the tax lien. Under subparagraph (1)(ii) of this 
paragraph, the lien is not valid against Y with respect to the advance 
(and the contractual interest thereon), because the advance was required 
to be made automatically under an agreement entered into before Y had 
actual notice or knowledge of the tax lien.
    Example 3. On May 1, 1964, C enters into a life insurance contract 
with the Z insurance company. On January 4, 1971, an assessment is made 
against C for $5,000 unpaid income taxes, and on January 11, 1971, in 
accordance with Sec. 301.6323(f)-1, a notice of lien is filed. On 
January 29, 1971, a notice of levy with respect to C's delinquent tax is 
served on Z company. The amount which C could have had advanced to him 
from Z company under the contract on the 90th day after service of the 
notice of levy on Z company is $2,000. The Z company pays $2,000 
pursuant to the notice of levy, thereby satisfying the levy upon the 
contract in accordance with Sec. 6332(b). On February 1, 1973, Z 
company advances $500 to C, which is the increment in policy loan value 
since satisfaction of the levy of January 29, 1971. On February 5, 1973, 
a new notice of levy for the unpaid balance of the delinquent taxes, 
executed after the first levy was satisfied, is served upon Z company. 
Because the new notification was not received by Z company until after 
the policy loan was made, under paragraph (1)(iii) of this paragraph, 
the tax lien is not valid against Z company with respect to the policy 
loan (including interest thereon in accordance with paragraph (a) of 
Sec. 301.6323(e)-1).
    Example 4. On June 1, 1973, a tax assessment is made against D and 
on June 2, 1973, in accordance with Sec. 301.6323(f)-1, a notice of 
lien with respect to the assessment is filed. On July 2, 1973, D 
executes an assignment of his rights, as the insured, under an insurance 
contract to M bank as security for a loan. M bank holds its security 
interest subject to the lien because it is not an insurer entitled to 
protection under section 6323(b)(9) and did not become a holder of the 
security interest prior to the filing of the notice of lien for purposes 
of section 6323(a). It is immaterial that a notice of levy had not been 
served upon the insurer before the assignment to M bank was made.

    (j) Passbook loans--(1) In general. Even though a notice of a lien 
imposed by section 6321 is filed in accordance with Sec. 301.6323(f)-1, 
the lien is not valid against an institution described in section 581 or 
591 to the extent of any loan made by the institution which is secured 
by a savings deposit, share, or other account evidenced by a passbook 
(as defined in subparagraph (2) of this paragraph (j)) if the 
institution has been continuously in possession of the passbook from the 
time the loan is made. This paragraph applies only to a loan made 
without actual notice or knowledge (as defined in paragraph (a) of Sec. 
301.6323(i)-1) of the existence of the lien. Even though an original 
passbook loan is made without actual notice or knowledge of the 
existence of the lien, this paragraph does not apply to any additional 
loan made after knowledge of the lien is acquired by the institution 
even if it continues to retain the passbook from the time the original 
passbook loan is made.
    (2) Definition of passbook. For purposes of this paragraph, the term 
``passbook'' includes--
    (i) Any tangible evidence of a savings deposit, share, or other 
account which, when in the possession of the bank or other savings 
institution, will prevent a withdrawal from the account to the extent of 
the loan balance, and
    (ii) Any procedure or system, such as an automatic data processing 
system, the use of which by the bank or other savings institution will 
prevent a withdrawal from the account to the extent of the loan balance.
    (3) Example.
    On June 1, 1970, a tax assessment is made against A and on June 2, 
1970, a notice of lien with respect to the assessment is filed in 
accordance with Sec. 301.6323(f)-1. A owns a savings account at the M 
bank with a balance of $1,000. On June 10, 1970, A borrows $300 from the 
M bank using the savings account as security therefor. The M bank is 
continuously in possession of the passbook from the time the loan is 
made and does not have actual notice or

[[Page 239]]

knowledge of the lien at the time of the loan. The tax lien is not valid 
against M bank with respect to the passbook loan of $300 and accrued 
interest and expenses entitled to priority under Sec. 301.6323(e)-1. 
Upon service of a notice of levy, the M bank must pay over the savings 
account balance in excess of the amount of its protected interest in the 
account as determined on the date of levy.

[T.D. 7429, 41 FR 35501, Aug. 23, 1976]